Govt. urged to steer clear of haircut on rupee debt

9 September 2022 09:31 am - 10 - {{hitsCtrl.values.hits}}

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Senior banker cautions haircut on rupee debt will hurt entire economy
Says nobody in a position to take a haircut
Warns of massive capital adequacy issues for banks
Says biggest losers will be EPF members
Suggests restructuring of T-bills for the long-term to provide breathing space for govt.

By Shabiya Ali Ahlam
As Sri Lanka is in the midst of securing fund disbursement from the International Monetary Fund (IMF) to bail out the crisis-struck economy, all measures must be taken to avoid a haircut, particularly on the country’s domestic debt, so that long-lasting negative impacts on the economy can be evaded.

Financial consultant and former senior banker Mangala Boyagoda stressed pertaining to the debt restructuring effort that is underway, it is essential for the government to steer clear of any haircut, especially on the domestic debt front.

“Without taking a haircut, we must see the possibility of restructuring the domestic debt. Because if we do take a haircut, the entire economy, everybody is going to get hurt. The ground reality is such that nobody is in a position to take a haircut on the domestic debt,” asserted Boyagoda while addressing a webinar titled ‘Restructuring of Foreign and Local Debt and Impact on the Economy and Society,” organized by CMA Sri Lanka.

With regard to the domestic debt front, out of the Rs.3.3 trillion Treasury bills outstanding, the Central Bank holds 61 percent, and commercial banks hold 27 percent. As with Treasury bonds, the outstanding is Rs. 8.2 billion, where the Employees’ Provident Fund (EPF) holds 32 percent and banks 24 percent.

Boyagoda pointed out that if there is a haircut of even 20 percent of what the Central Bank currently holds, there will be a flight of Rs. 400 billion. Taking a hit will also be the capital adequacy of commercial banks if they take a haircut on
their debt.

He also pointed out that another segment of the biggest losers will be the EPF holders whose returns were 9 percent last year.

Boyagoda further cautioned that the people will also suffer as their domestic savings will have very little or no value, as the inflation is of about 65 percent and the rupee has depreciated by approximately 75 percent since March.

As the CBSL is the trustee of the EPF, where people have invested by placing their trust in a government institution, the former senior banker said it is incorrect to push for a haircut as it is their hard-earned money.

Instead, he suggested that restructuring the Treasury bills for the long-term will provide the government with much needed breathing space.

There is no clear indication from the authorities yet whether the country’s rupee debt will be restructured along with the dollar debt.

In a recent report, Fitch Ratings said its ‘CCC’ rating on Sri Lanka “reflects a high risk that local-currency debt will be included in debt restructuring, as the stock and interest costs are large and omitting it could increase the restructuring burden on holders of foreign-currency debt”.

“The Central Bank Governor in late August affirmed that Sri Lanka would not restructure domestic debt but this was partly in response to comments from President Wickremesinghe that appeared to suggest that this policy option was being examined,” it added.

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Comments - 10

Lumbini Friday, 09 September 2022 12:05 PM

We are in such a messy situation with very high inflation and domestic debts. Without a haircut what is your solution?

Hoping to retire in few years Friday, 09 September 2022 09:33 PM

It is really about reducing by a percentage the EPF. I'm in private enterprise and for years put in money into EPF. Never expected this. I don't want even a 0.01% cut on my EPF or any god-damned haircut either. Find another solution instead of taking my retirement money. Sell out all temple land, church land, mosque land, does not matter, don't take from people expecting to retire.

Khayyam Friday, 09 September 2022 02:49 PM

Following LKR depreciation and sky-high inflation, Sri Lankan G-Sec investors are much like Mr. Boyagoda in this picture. There is a good argument to be made against a further haircut on a group of investors who have already lost their hair.

No to hair cut Friday, 09 September 2022 03:47 PM

I read the whole article, but I did not find any clue to the word "Hair Cut." What does it mean? Is this to say something about the bold head of Mr. Mangala Boyagoda? There are others who are like me! One thing for sure; If there is somebody to be punished for 3.3 trillion domestic loan, put Cabraal behind bars. You can shave his head.

Randula Jayamaha Friday, 09 September 2022 04:03 PM

This is a bit damning. If there won't be 'haircut' to domestic debt the international dollar creditors are going to be much harder to deal with. They'll say they take the pain, while we take all the benefits of lessened dollar debt. Central Bank can print money as much as necessary to put in what government can't pay local rupee debtors so this again seems more sham and tricks. The use of the 'haircut' the pay less than what's owed is now starting to sound devilish as well.

Charitha Perera Friday, 09 September 2022 04:31 PM

Mahendran as as CBSL governor did thorough damage to the EPF. Now the terrible current CBSL governor trying to spoil EPF again. Trying to devalue/haircut the hard worked earnings of us all who put into the EPF. I am better not putting into the EPF, if I can only expect to get back less than I put in.

S. V. De Silva Friday, 09 September 2022 04:47 PM

How many of them who have acquired wealth within tax bracket pay taxes?. Increase taxes and reduce government expenditure.

Punchi Saturday, 10 September 2022 04:19 AM

Solution is to get our well fed Theros to deliver on what they have been feeding us that we and our land is blessed - invoke Buddha to bestow on us his munificence

Rukshan P Saturday, 10 September 2022 10:54 AM

Yes this is typical … locals not wanting to foot the bill for the government THEY decisively elected but instead expecting the foreigners to take the hit on the bankrupted Sri Lankan economy. If the local debt market doesn’t wear some of the loss, there will be little forgiveness by foreign parties. Why should they lose more so Sri Lankans suffer less? The local population, including all the uneducated buffalos in deep southern districts must remember forever how the Rajapaksa family screwed them. It needs to be a painful generational lesson so that cheating, graft, corruption and nepotism is never allowed to bankrupt this nation again.

Rohantha Seneviratne Saturday, 10 September 2022 06:09 PM

@Rukshan P, Your argument doesn't really hold water. International Debt holders had a choice when investing in ISBs. They are experienced investors who were fully aware of the country situation and punted on high returns knowing full well the risks involved. Locals don't have a choice as to where their retirement money/EPF is invested and neither does the EPF really. So the argument that locals need to take the hit just because the ISB holders get a haircut is null and void. I am in agreement with what Boya has expressed.

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Govt. urged to steer clear of haircut on rupee debt

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